A firm in a purely competitive industry is currently produci

A firm in a purely competitive industry is currently producing 1000 units per day at a total cost of $450. If the firm produced 800 units per day, its total cost would be $300, and if it produced 500 units per day, its total cost would be $275. • What is the firm’s ATC per unit at these three levels of production? • If every firm in this industry has the same cost structure, is the industry in long-run competitive equilibrium? • From what you know about these firms’ cost structures, what is the highest possible price per unit that could exist as the market price in long-run equilibrium? If that price is the market price and if the normal rate of profit is 10%, how big will each firm’s accounting profit be (per unit)?

Solution

1)

What are the firm’s ATC per unit at these three levels of production? The average totalcost (ATC) is found by dividing total cost by the number of units being produced.ATCfor 1000 units is $0.45 (=$450 / 1000).ATC for 800 units is $0.375 (=$300 / 800). ATCfor 500 units is $0.55 (=$250 / 550).

2)

If every firm in this industry has the same cost structure, is the industry in longruncompetitive equilibrium? No, because the firm is producing 1000 (as stated in thequestion) this industry cannot be in long-run equilibrium because it is not producing atthe lowest ATC (ATC at 1000 units is greater than ATC at 800 units)

C)

From what you know about these firms’ cost structures, what is the highest possible priceper unit that could exist as the market price in longrun equilibrium? The highest possibleprice that could be supported in the long-run is the lowest ATC in the industry. Given theinformation above this is $0.375 or $0.38 after rounding

D)

Given that the long-run market price is $0.38 and if the normal rate of profit is 10 percent, then how big will each firm’s accounting profit per unit be? Since the normalrate of profit is 10% and the firm will charge $0.38 for each unit in the long run, theaccounting profit will be $0.038 (3.8 cents per unit). This is 10% of the price (=.10 x$0.38)